PhD project 1

The Roaring Thirties: Productivity Growth and Technological Change in Great Britain and the United States during the Early Twentieth Century

Pieter Jacob Woltjer

1: Introduction

Where most of the academic contributions studying the United States during the Depression era focused on the output not produced, income not earned and resources not exploited, the economic historian Alexander Field argues that the 1930s were actually the “most technologically progressive decade of the century.” The period 1929–1941, Field shows, witnessed little to no growth in both labor hours and capital for the US private non-farm economy. Nevertheless, the output of this sector was 33 to 40 percent higher in 1941 as compared with 1929. This gap between the growth of output and inputs reflected improvements in total-factor productivity (TFP) or disembodied technological change, which Fields put somewhere between 2.3 and 2.8 percent per annum over this twelve-year period. These gains in TFP represented, according to Field, real improvements in the productive capacity of the American economy.

Woltjer’s thesis reexamines the comparative labor-productivity performance of the United Kingdom – the main industrial-rival of the US. In light of the dynamic productivity developments reported by Field, he reassesses the British technological and organizational innovations and provides a novel explanation for the rapid divergence of the Anglo-American labor-productivity levels, observed during the early twentieth century. Chapters 2 and 3 present new benchmarks of Anglo-American comparative labor productivity, establishing the relative productivity gap between the two leading industrial nations at both the start of the twentieth century (ca. 1910) as well as during the interwar era (1935). Chapter 4 discusses technological change, capital accumulation and efficiency decline in Britain and the US between the wars. Lastly, chapter 5 reexamines the role of American labor quality for the first half of the twentieth century.

2: Taking Over

In chapter 2, Woltjer shows that, on the eve of the First World War, the Anglo-American aggregate income and productivity gap was greater than suggested by previous estimates. Particularly the American agriculture, mining and manufacturing sectors demonstrated a strong performance in comparison to their British counterparts. Around 1910, value added per hour worked in US manufacturing, for instance, was a little over twice as high as it had been in the UK.

3: Depression Dynamics

Regardless of the substantial lead of the US over the UK, set out in chapter 2, the American manufacturing sector forged even further ahead during the 1920s and 1930s. This led to a continued widening of the productivity gap to almost 280 percent in 1935; as Woltjer demonstrates in chapter 3. Strikingly, there appears to be no evidence for a ‘temporary cyclical narrowing’ prior to the Second World War, as suggested by Broadberry. On the contrary, when labor input is adjusted for hours worked, the productivity gap observes a continued upward trend throughout the depression years. The steady divergence of the Anglo-American labor-productivity levels in manufacturing corroborates Field’s claim of major productivity improvements in the US during the 1930s.

4: The Great Escape

Chapter 4 reassesses the productivity dynamics in British manufacturing during the early twentieth century. By means of a data envelopment analysis (DEA), Woltjer assesses the effects of capital accumulation, technological change, and efficiency change on British and American labor-productivity growth. Here he finds evidence for a considerable increase in the capital-intensity levels within British manufacturing. Manufactures, particularly in the ‘new’ industries – i.e. transportation equipment, printing, chemicals, petroleum and rubber – actively began to adopt modern techniques of mass-production and managerial control. Even though by 1930 British capital intensity levels still trailed the United States by almost two decades, overall dissimilarities between best-practice production techniques used in American and British manufacturing industries disappeared to a large extent. British producers of motor vehicles, for instance, were following the path set out by the American vehicle industry.

As demonstrated by the steady divergence of the Anglo-American labor productivity levels, this process of capital deepening was not accompanied by an immediate labor-productivity increase in British manufacturing. In contrast to existing literature, Woltjer does not interpret the lack of catch-up growth during the 1920s and 1930s as a failure on the part of British entrepreneurs. Instead, he suggest a sequence where first opportunities for growth are created followed by a period of learning-by-doing and actual productivity catch-up. The initial phase of catch-up, the adoption of new production techniques through the accumulation of capital, involved an extensive transformation of the production process. This caused efficiency levels to deteriorate in the short run. Only after the economy had successfully adjusted to the new state and has ‘learned’ to operate the new technology at its full potential, could the labor-productivity gap to the frontier be narrowed. In line with Field’s argument for the US, Woltjer argues that the advances made during the depression years provided the basis for much of the labor and total-factor productivity growth of British industry during the Golden Age (1948-73).

5: The American Human Capital Revolution

In chapter 5, Woltjer turns to the American advances in educational attainment and its effects on the countries’ productivity potential. As shown by Goldin and Katz, the Americans had a strong tradition of educating their youth at public charge. The American approach to schooling stood in stark contrast to the European system, which was still reserved for the relatively rich. The advances in schooling during the early twentieth century transformed the American workforce and prepared the American youth for a wide array of potential tasks and occupations, allowing them to adequately respond to the considerable technological change that marked this period. Various authors have claimed that America’s approach to schooling was one of the driving forces behind its technological dynamism and paved the way for rapid economic growth.

In order to fully assess the impact of the substantial investments in schooling on the American economy, chapter 5 turns to an approach developed by Jorgenson and Griliches. The key innovations in their work was to adjust the traditional measure of labor input for improvements in quality. Overall, Woltjer finds that labor quality exhibited a steady increase in the decades between 1900 and 1950. The average growth during this period was just over 0.7 percent per annum which, by comparison to both more recent decades as well as the development of human capital in other countries was quite rapid. This growth resulted primarily from a general shift of employment from the low-productive agricultural sector to high-productive sectors (e.g. finance, professional services, etc.) in conjunction with a general rise in the educational attainment of the workforce. These new estimates closely agree with the continuous increase in the average years of schooling observed by Goldin and Katz. Consequently, one can conclude that Field’s earlier claim that the change in labor-quality during the depression years played only a minor role in the rapid growth of output per hour and TFP does not stand up under scrutiny.

PhD project 2

Joost Veenstra

1: Introduction

At the turn of the twentieth century a labor-productivity gap emerged between Europe and the US in manufacturing with the former lagging increasingly far behind the latter. This transatlantic gap in economic performance proved irreversible and persists until the present day. As such, it is a main feature of modern economic development. The beginning of this divergence coincided with a period of rapid technological change, the second industrial revolution, which raises the question whether European countries failed to effectively catch the winds of change and miss out on opportunities for growth? Veenstra’s thesis addresses this question for Germany, a country that given its prominent position in Europe is underrepresented in the literature, in the period 1900-1940.

2: Catching-up with the Global Labor-Productivity Leader?

Chapter 1 sets the stage for Veenstra’s study by measuring German/US comparative labor productivity in manufacturing industries for the years 1909 and 1936/35. For this purpose state-of-the-art techniques are employed to construct benchmarks of comparative labor productivity. The benchmarks uncover a large labor-productivity gap in both periods at the level of total manufacturing, but the variation of comparative performance across industries is substantial. General theories have difficulty accounting for this cross-industry variation in comparative German-American labor productivity, but two patterns stand out.

First, production in the strong performing German industries involved mainly goods used as intermediates in other industries. European markets have been associated with heterogeneous demand patterns - which discouraged the adoption of standardized production processes - but industries involved in the production of basic goods may not have suffered from this. Second, there appears to be an overlap between German industries with relatively high labor-productivity levels and those associated in the literature with relatively large establishment size and a high degree of vertical integration. Both forms of industrial organization are associated with economies of scale.

3: The Yanks of Europe?

In chapter 2 Veenstra studies the drivers of the labor-productivity gap measured in chapter 1. The US lead over Europe is traditionally explained by the former’s use of production technology that was relatively capital-intensive. In the US a scarcity of skilled labor and an abundance of natural resources provided an incentive to substitute machinery for labor. The supply of factor inputs faced by European producers differed, which encouraged the adoption of less capital-intensive technology. If the labor-productivity potential of technology increases with capital intensity, differences in relative factor costs may explain the transatlantic labor-productivity gap.

Using data envelopment analysis (DEA) Veenstra shows that Germany enjoyed a higher rate of capital-intensity increase over the interwar period, a finding that questions the validity of the traditional explanation of the labor-productivity gap. The rapid increase of capital intensity in German manufacturing created a large potential for labor-productivity growth. Yet this potential for growth was not realized in the short run, an inefficiency that may be explained by learning effects: it takes time to assimilate new technology. By the late 1930s the bulk of the labor-productivity gap stemmed from Germany’s relative low level of efficiency, rather than from a lack of capital-intensive technology.

4: Industrial Output Growth in Pre-WWII Germany

Chapter 3 moves on to critically assess the measurement techniques conventionally employed in long-run economic history by addressing the debate on German output growth over WWI. Studies on long-run economic growth are often plagued by limited data availability, particularly for early periods. In the absence of, for instance, production data, the unobserved output change can be proxied by the behavior of correlates. However, the correlation between the proxy and target series is never perfect, which introduces inaccuracy to the estimates and may spark off a debate concerning the appropriateness of different proxies.

Conventionally, scholars choose between the alternative time-series estimate. In this chapter Veenstra explores the potential of a different technique, state space time series analysis, which uses all observed series to estimate a common component that captures the unobserved level of output. Applied to the debate about output growth in German industry, this new approach suggests that Germany enjoyed a small labor-productivity advantage over the UK already before WWI. Moreover, when the estimation uncertainty is taken into account, Veenstra shows that most of the benchmark and time-series estimates of German performance previously presented in the literature are not statistically different.

5: Did a European Convergence Club Exist Before WWI?

In chapter 4 Veenstra addresses the possibility of a European convergence club in manufacturing before WWI. The notion of convergence of manufacturing labor-productivity levels is particularly relevant for the pre-WWI era, as the period 1870-1913 is characterized by openness to trade and globalization. Trade theory suggests that openness to trade reduces differences in relative factor prices, encourages the adoption of increasingly similar technology and leads to a common growth path. Veenstra studies this possibility by constructing benchmarks of comparative labor productivity for the US, UK, Germany, France, the Netherlands and Sweden around the year 1910.

Despite the openness to trade, the benchmarks show that the level of labor productivity had not converged between European countries before WW1 and marked differences persisted, both for total manufacturing and manufacturing branches. Moreover, backward extrapolation of comparative labor productivity to 1870 points out that the dispersion of performance hovered around a constant level throughout the period and showed no signs of convergence. These findings are in sharp contrast to total-economy developments; GDP per capita levels converged steadily in the period 1870-1913. Convergence at the country level was fueled by factors other than manufacturing labor productivity.

PhD project 3

British Failure? Britain's Relative Economic Decline in an International Context, 1936-1970

Nikita Bos

Forthcoming

The Yankees of Europe?

A New View on Technology and Productivity in German Manufacturing in the Early Twentieth Century

ABSTRACT

Labor productivity in German manufacturing lagged behind the United States in the early twentieth century. Traditionally, this is attributed to dichotomous technology paths across the Atlantic. However, various industry case studies suggest rapid diffusion of U.S. technologies. We develop a novel framework to reconcile these findings. Labor-productivity gaps are decomposed into differences in technology and differences in the efficiency with which technology is used. We find that by 1936 in the majority of industries inefficient assimilation of modern technologies - and not the use of different technology - accounted for most of the U.S./German labor-productivity gap.